The ECB will do “whatever it takes” to bring inflation to 2%, vice president says

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De Guindos told TBEN that the ECB will do “whatever it takes” to curb inflation.

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According to her vice president, it is crucial that the European Central Bank expresses its commitment to lower prices to keep inflation expectations anchored.

Luis de Guindos told TBEN’s Annette Weisbach on Wednesday that the biggest risk of a wage-price spiral was the perception that the central bank’s credibility was not strong enough.

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“That is why we make such a commitment to price stability … and that we will do whatever it takes to bring inflation back to the level we consider price stability, which is 2%,” he said.

Eurozone wages have risen, but not yet at a rate that was “excessive,” de Guindos said.

But, he added, the lesson of the 1970s stagflation was that monetary policy should be aimed at avoiding second-round effects.

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Eurozone inflation is at 10.7%, the highest level in the bloc’s history, and the ECB has raised its reference rate to 1.5%, a level not seen since 2009, before the sovereign debt crisis.

De Guindos said he could not specify what the ECB’s final interest rate would be, even as markets demanded “guidance”, but the central bank had to “say very clearly that we are going to do our job, that we will reduce inflation, and that we will raise rates to levels consistent with the convergence of inflation to our definition of price stability.”

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The ECB published a Financial Stability Review on Wednesday, outlining the challenges faced by businesses and households as a result of the poor economic outlook, high inflation and monetary tightening.

It argues that governments should provide targeted support to vulnerable sectors without hindering the normalization of monetary policy.

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Economists predict that the eurozone is heading for a deep recession amid declining consumer confidence.

De Guindos said banks should be “cautious and prudent”, not be blinded by a short-term increase in profitability due to higher interest rates, and prepare for the possible coming increase in insolvencies and the reduced repayment capacity of households.

The tight labor market, with unemployment at an all-time low, has been a “positive factor” – but it is not guaranteed to continue in the future, he continued.

However, he downplayed the risks of the kind of fragmentation in the euro area that could be an early indicator of a new debt crisis, noting that spreads between government bonds had not widened significantly in recent months and that the ECB was developing new anti-fragmentation tools. ready to deploy.

He also said eurozone countries had not experienced “the kind of mishaps we saw in the UK with the mini-budget”, and he hoped they would not.

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A series of unfunded tax cuts and growth support measures announced by the UK’s short-serving Prime Minister Liz Truss, which came as the Bank of England raised interest rates and was about to start selling bonds, wreaked havoc on the gold-plated market and almost caused pension funds to collapse.

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On quantitative tightening, De Guindos told TBEN: “My personal view is that we have to be cautious. It has to happen, it has to be part of the monetary policy normalization process, but at the same time, given the level of unknowns, on the potential impact of QT, I think we have to do it very carefully.

“It should be kind of a passive QT, and try to reinvest only a percentage of the maturities of the bonds we have in our portfolio across different time horizons.”